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Buying life insurance

Updated on February 21, 2008

Why do you need life insurance?

You need life insurance to protect your family, assuming the responsibility to financially support your family or loved ones after you leave this world.

How much insurance do you need?

The estimate should be based on the calculation of how much we need to cover debt, replace the income you are making, mortgage payment, and children's education cost. The important thing is to ensure that your surviving spouse has enough resource to live as long as he/she can. Usually, maximum we can buy as much as 10 times of your current income. You may not get approval if you apply more than this amount.

What kinds of life insurance are available?

Once we decide how much insurance we need, we need to shop around and see what kinds of life insurance are available. Currently, there are several types of life insurance are on the life insurance market. These life insurances are categorized into term and permanent life insurances. The later category is further classified as whole life, universal life, variable life, and variable universal life. Every type of life insurance has its own characteristics and suitable situation to which it can be used most efficiently. In the following sections each of these life insurance policies will be discussed with more details.

Term life insurance

As the name implies, term life insurance only cover a specified period of time such as 10 years, 15 years, or 20 years. The premium paid is absolutely for insurance cost. Once the term is expired, you are not covered any more. If you want to continue to be covered, you have to apply for a new policy based on your age, physical health at that time. The premium you pay for the new policy could be much more expensive than the previous one.

Whole life insurance

Whole life insurance is a policy where the premium you pay remains level for the whole of the insured's life. In the early part of the policy years the insured overpay and later years the insured underpay the premiums for the cost of the current year's mortality an expenses. The premium amount left after paying the current year's cost is invested in the company's general account that is mainly composed of long-term bond and mortgage. This kind of investment portfolio historically produces 5% to 6% return per year. There are also participating whole life and nonparticipating whole life. Participating whole life can get guaranteed return and dividends, but nonparticipating whole life can only get guaranteed return. Whole life insurance matures at age 100. if you are still living at 100 years old, you take the money out that is equal to your death benefit, you have to pay tax on the earnings.

Universal life insurance

This type insurance was evolved during later 1970s and early 1980s in response to then current market demand. Universal life insurance has some unique characteristics including complete transparency, ability to vary and skip premiums, flexibility of death benefit, death benefit options, and right to withdraw account value. Since universal life came into being, it has made all the information about the policy transparent to the policy owner. All the specific expense charges, the costs deducted for the amount at risk, the specific account value, and the amount of interest that is being paid on the account value are available to the owner.

Variable life insurance

Variable life insurance was put into marketplace in late 1976. It is a policy where the insurance element is predominant, and the cash value of the policy is funded by the separate account of the insurance company. Variable life insurance provides minimum death benefit guarantee. The insurance company assumes the mortality and expense risks. Once the policy is put into place, the cash value of the policy fluctuates with the investment results of the underlying investment funds. With this kind of policy you have the ability to direct your account value to the investment of choice from those offered, which provides you an opportunity for investment diversification. If working well with these policies you can obtain life insurance protection, diversified investment capital, professional management for your money, and the ability to redirect your investment without incurring any tax liability.

Variable universal life insurance

Variable universal life insurance combines some characteristics from both universal life and variable life insurances. With this life insurance policy, you have the flexibility and control as to premium payment, investment options, and death benefit options. It is the most efficient life insurance and investment product if used correctly and for the specific purposes for which it is designed.

From above discussion, you can see there are five types of life insurance available. Every kind has its own characteristics. How should you choose the best one from these policies?

Which kind of life insurance is best for you?

No any policy is suitable for all. The most suitable is the best. You have to choose the policy based on your financial situation and insurance need. So the next question we need to ask is what resources are available to finance your life insurance policy? If you are 35 years old with a family of four, two young children under 5 years old and a wife without income, you annual income is $35,000 and monthly discretionary income is $500, and in the near future you may find a better job and make much more money, then your best choice should be variable universal life. If you have only $250 available, then term life insurance is the best for you.

In summary, buying a life insurance is not hard, but buying the best life insurance is not easy. To buy the best life insurance, you need to do research and shop around. The most important is to ask an experienced and reliable insurance agent or financial professional for advice, because you may not get very detailed information about specific life insurance policy as a layman to insurance industry.


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